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Builders use various strategies to cope with volatile lumber prices

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Builders have been beset with unstable lumber prices. In fact, rising prices and the availability of building materials ranked as the top challenge builders expect to face this year, according to the April 2021 survey for the NAHB/Wells Fargo Housing Market Index.

In its monthly survey – which the National Association of Home Builders has been conducting for 35 years – NAHB added a question asking builders how they are coping with the challenge of volatile prices and supply.

Softwood lumber prices nearly doubled during an unprecedented four-month surge in 2020, according to NAHB. Since reaching an all-time high in September, prices continue to fluctuate and even surged past that historic peak earlier this year.

NAHB estimates rising softwood lumber prices over the past 12 months have added $35,875 to the price of an average new single family home. For an average new multifamily home, the market value jumped nearly $13,000. Researchers say that increase means households will pay $119 more a month to rent a new apartment.

Nearly half (47%) of single-family buildings in the Housing Market Index (HMI) panel indicated they were including price escalation clauses in their sales contracts. Thirty percent said they were pre-ordering lumber and 22% are obtaining lumber price guarantees from their supplies.

By smaller numbers, builders are dealing with fluctuating prices by:

  • Otherwise delaying building or sales when costs spike (19%);
  • Laying the foundation, then pausing before starting the framing (15%);
  • Including shared price clauses in contracts (10%);
  • Using lumber options or futures to hedge against future price changes (4%)
  • None of the aforementioned responses (13%).

In reporting the findings of its April survey, NAHB researchers noted neither guaranteeing prices for a month, nor any of the other practices builders cited, completely compensates for the historic surge and price volatility the industry has been experiencing. “Price escalation clauses seem to offer some protection for builders, but don’t prevent them from losing sales to customers unable to afford the escalated house prices,” stated Paul Emrath, Ph.D., the association’s vice president for survey and housing policy research.

NAHB said housing starts have been “relatively strong” lately, but noted a rising number of unused permits signaled some stress in the market. The group’s housing affordability pyramid shows the strength is due largely to demand at the high end of the income distribution.

A large number of households with more modest incomes have been priced out of the market for new homes. In fact, its 2021 Priced-Out Estimates shows that 75.1 million households are unable to afford a median priced new home, and an additional 153,967 would be priced out if the price increased by $1,000.

The National Association of Home Builders is a Washington-based trade association representing more than 140,000 members involved in various aspects of residential and light commercial construction. NAHB is affiliated with more than 700 state and local home builder associations around the country.

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